05 May 2009

Finem Respice on 'The Cult of Buoyancy'

Finem Respice is one of my newest favorite blogs, and I’m almost
embarassed to not have found it sooner. Written by an insider in the
private equity world, it’s an interesting take on finance and politics
that’s different from the investor’s view one gets from outlets like
Seeking Alpha or Calculated Risk, or even the economist’s
perspective embodied in Tyler Cowens’s Marginal Revolution.
Perhaps because it’s written by someone engaged in a profession –
that of PE financier – that has lately been made a scapegoat by
politicians looking to distract the angry mob from their own
incompetence, it doesn’t pull punches where they are deserved.

With that by way of general introduction, the article that caught my
eye on FR was “Human Sacrifice At The Altar Of The Cult Of
Buoyancy,” which suggests that not only is the ‘bubble
mentality’ that led to the overheated technology sector and real
estate market not dead, it’s driving the current “recovery” plans by
the Obama administration.

Everything in the present climate and the events of the last 30
years is suggestive of bubble worship, unshakable and dangerously,
even dogmatically religious in its practice, and consequences. The
only aspect of the Cult of Buoyancy in opposition to its title is
the lack of fringe status. The Cult of Buoyancy is mainstream.

The ‘Cult of Buoyancy’ is, in short, the belief – bordering on
religious faith – that the economy ought, perhaps must, return
steady gains year after year, and that if anything interrupts this
giant money-printing machine, something is gravely in need of
‘correction.’ Viewed through this lens, I can imagine a believer
thinking that market corrections such as the popping of the tech
bubble and the current RE slide are not only undesirable, they are
unnatural, and must therefore be the fault of some shadow
conspiracy. (Whether they actually believe that or not is immaterial;
the important point is that there are clearly people in influential
positions who act as though they believe it.)

The administration is in the thrall not of the High Priests of
Capitalism, but of the Cult of Buoyancy. In retrospect it is quite
obvious. The administration wants banks for one purpose. To pump out
more loans. Period. This perspective makes almost all of the
administration’s actions perfectly logical.

This doesn’t strike me as a particularly controversial assertion. The
Obama administration has come very close to saying it outright at
various times; their goal is to pour enough cheap money into the banks
to “restart” lending (as if it ever stopped; it just stopped being
quite so dirt cheap), get the economy back on an upward trajectory via
consumer spending and mortgage lending, and – although they generally
don’t say this part out loud – leave the underlying problems for
someone else to fix at a later date. They take the credit, maybe get
a second term out of it, during which they administer another dose of
painkiller and soothing words, and are long gone from DC when the
patient realizes they’ve been getting morphine for the cancer that’s
been steadily worsening all along.

Someone is going to have to stand up and point out to the investing
public that there is no quick fix. Someone is going to have to work
to start deprogramming the United States after three decades of
indoctrination. So long as the Cult of Buoyancy holds such sway, we
will never see rational measures to put the economy back on track.
We will see the same, tired and now clearly very dangerous tools at
work. Inflation. Centralized interest rate planning. Underwriting
standards tinkering. Rampant consumerism. Class warfare.

Amen. Of course, I don’t have any real hope that such a ‘someone’
will ever come from Washington; our political system just isn’t
designed to allow for it. The public will get milquetoast populists
bearing empty platitudes until the flaws in our economy are too
obvious to ignore; a point that we are probably at least another one,
if not two, boom/bust cycles away from.

The ‘Cult of Buoyancy’ is but a small splinter sect of the big-tent
Church of Growth, and that church includes as its adherents virtually
everyone who matters in politics, and a fair share of both the Left
and Right intellegensia. Even more dangerous than the belief in
‘buoyancy’ with regard to equities and commodities is the belief that
the growth experienced by the United States in the 20th century can
continue unabated into the next. Any policy founded on this belief,
on an assumption of basically never-ending growth, is doomed to
failure – possibly spectacular failure, if the policy involves
critical social functions like healthcare or retirement.

The current administration’s embrace of cheap-money policies as
“solutions” to what they perceive as an economic malfunction is
interesting in itself, but the immediate effects of such a policy pale
in comparison to its importance as a telltale of an underlying growth
uber alles philosophy that makes its non-economic domestic agenda
far more dangerous than it might otherwise be.